Gov. Wolf to veto pension bill just as he did budget and liquor bills sent his way by GOP

HARRISBURG — Democratic Gov. Tom Wolf has vetoed the remaining piece of the Republican-controlled Legislature's 2015-16 budget plan: a bill to reduce pension benefits for future school employees and most future state workers to help reduce long-term debt.

In doing so Thursday, Wolf offered several reasons:

•He believes a section of the bill violates federal tax law.

•He says there are no immediate cost-savings to taxpayers.

•He says new workers would be forced to pay down old pension debt.

•He doesn't think the state would be able to attract qualified job candidates.

Wolf said he could support parts of the bill, but says it's not comprehensive or fair enough to sign.

Wednesday marked the first full week of Pennsylvania's budget impasse. Still, Democratic Gov. Tom Wolf and the Republican-controlled Legislature do not appear any closer to compromising on their respective financial and policy differences to reach a mutual accord on a 2015-16 spending plan.

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(Steve Esack)

Wolf has said he agrees with the Senate pension plan to cap overtime pay and average out final salaries over a longer period to control higher benefit spikes. Wolf also supports the Senate plan to preclude retirees from getting a higher financial windfall through a reworked lump-sum withdrawal provision.

Republican legislative leaders, who last week watched Wolf veto their budget and liquor privatization bills, were dismayed at the veto of the pension bill, which was estimated to save more than $11 million over three decades.

In a statement, GOP House and Senate leaders said Wolf was vetoing a bill that gave lawmakers and public sector workers a 401(k) retirement package similar to private-sector workers, including those at Wolf's former kitchen cabinet supply company in York County.

The private sector does have 401(k) pension plans, but the Republicans' bill carries other, more complex retirement packages that would never be offered in the private sector, said Rick Dreyfuss, a Dauphin County business consultant and actuary. In addition, Dreyfuss said, Wolf appears to be correct when he says the bill would violate an Internal Revenue Service law.

"You would never see this arrangement in the private sector," said Dreyfuss, who also serves as an adjunct fellow at the Manhattan Institute, a free-market think tank in New York.

The pension bill seeks to limit mounting long-term debt now estimated to be $50 billion for the state workers' and school employees' retirement systems. The bill would end taxpayer-backed retirement benefits. Guaranteed plans are funded by contributions from workers, the employer and an assumed 7.5 percent rate of return on investment earnings of both contributions.

The pension bill would give new hires a two-tiered retirement package tied more closely to the ups and downs of Wall Street.

One piece includes a 401(k) retirement plan, offered by many corporations, in which the worker and employer contribute percentage of salary and those joint contributions then ride the stock market. The other piece — which Wolf says violates IRS law — involves a so-called cash-balance plan, which offers a guaranteed benefit that is less volatile than a 401(k).

In a cash-balance plan, the U.S. Department of Labor says the employer offers tax-deferred guaranteed retirement credits based on a set percentage of workers' compensation plus the interest rate tied to a U.S. Treasury bill rate. The employer must make good on those credits upon workers' retirement.

For example, the Labor Department says, a worker who contributes $100,000 to a cash-balance plan and retires at 65 has the option of cashing out the credits by taking an annual payment or by withdrawing a lump sum benefit equal to the total credit balance.

But Wolf said — and Dreyfuss agrees — that the cash-balance plan devised by Senate Republicans doesn't work that way. In the Senate bill, the employer is not required to contribute any credits and the employee contributes everything.

The Senate bill assumes the cash-balance plan will make a 7.5 percent rate of return. That return rate is built on workers contributing a mandatory 3 percent of their salary and the state allowing workers to receive up to 4 percent of the interest earned on their own contributions. Anything above 4 percent, the state keeps to pay off old pension debt.

"Not only is the employer putting in nothing, they are making money," Dreyfuss said. As a result, he said, workers would be entitled to receive a federal tax deduction on the earnings the state is keeping to pay down the unfunded liability and the IRS does not permit such a tax deduction to help the employer.

"They don't want a tax deduction to a benefit that would not go directly to the employee," Dreyfuss said.

The pension veto is the latest salvo in a weeklong budget stalemate between the first-term governor and Republicans who hold solid majorities in the House and Senate.

Wolf's $33.8 billion spending plan includes a cumulative 16 percent tax increase. Under his plan, income taxes would go up and sales taxes would rise, while the number of taxable items would expand. He would use some of those tax hikes to reduce local property taxes and close the $1.2 billion deficit.

Wolf also would put a higher tax and fee on Marcellus Shale gas drillers to pay for a $400 million boost in per-pupil spending in public schools.

The Republican-backed budget that Wolf vetoed is $30.1 billion. It would not raise taxes. It would close the deficit by delaying bills and shuffling money to different accounts. It would increase education spending at a lower rate than Wolf via the now-vetoed bill to sell off the state liquor store system for $220 million in new revenue annually. The vetoed pension bill was estimated to save about $11.1 billion over time.

The two sides do not appear any closer to reaching a mutual accord on an overall budget.